Kotval - (1.) THE following question of law has been referred for our decision at the instance of the Commissioner of Income-tax, Bombay City II : "Whether, on the facts and in the circumstances of the case, the assessee is entitled to the allowance under section 10(2) (vii) in respect of demolition of a part of the building, even though the loss is not actually written off in the books of the assessee ?"
(2.) THE question has arisen with reference to the assessment year 1957-58, and upon the following facts : Messrs. London Hotel, Bombay, are a firm and they run a hotel called "London Hotel". THE premises in which this hotel was being run were originally purchased by the three partners of Messrs. London Hotel on 7th September, 1945, for a sum of Rs. 1,15,000. THEy contributed to the consideration equally and when the London Hotel was started they treated the premises as being let out to the firm, the proprietary right vesting in the three partners jointly. THE rent paid by the firm to the three individuals was debited in the books of the firm and the firm claimed the amount as a deduction in the years 1946-47 and 1947-48, and the deduction was allowed. Thus the property was treated as the private property of the three persons who had purchased it, although they were partners in that firm. This position, however, was not accepted by the department in the assessment year 1948-49. The Income-tax Officer held that the premises in which the business of Messrs. London Hotel was being run were really a business assets of that firm and was liable to assessment as such in the hands of the firm. Consequent upon this order, depreciation on the property was being granted to the firm from the assessment year 1948-49 onwards under section 10 as a business asset of the assessee. However, so far as the account books of the assessee-firm were concerned, the asset was not shown as part of their assets, because the three partners of the firm always regarded it as their personal asset. During the financial year ending 31st March, 1957, a portion of the building, which has been found by the tax authorities to be a two-thirds of it, was demolished and the land underneath which thus became vacant was let out to Messrs. Burmah Shell for the erection of a petrol pump on a monthly rental of Rs. 2,100. The rent received from the Burmah Shell has been added by the authorities as the business income of the assessee-firm.
(3.) WE are concerned in this reference with a claim made by the assessee firm in the respect of the balancing payment due to them under section 10(2) (vii) of the Indian Income-tax Act and that claim was made on the basis of the following facts : The written down value of the building, according to the previous assessment orders, at the beginning of the relevant previous year was Rs. 91,580. When a part of the building was demolished the value realised on the sale of the materials or scrap after demolition was Rs. 12,300. The assessee claimed that out of the written down value two-thirds will have to be allocated to the portion of the building thus demolished and after giving an adjustment for the realisation of the scrap value, namely, Rs. 12,300, the balance would come to Rs. 48,754. They claimed that that amount should be allowed to them as a deduction under section 10(2) (vii). Section 10(1) and (2), clause (vii), run as follows : "10. (1) The tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respected of the profit and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances namely : -..... (vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value : Provided that such amount is actually written off in the books of the assessee." ;